Thursday, January 18, 2007

Thursday, January 18th: Morning Comments

10:09 AM CT - We continue to see a positive shift in the TICK. Volume is above average for this time of day, so I expect decent movement. Remember that we have Philly Fed coming up at 11 AM CT. I like to cement a lesson from each trading day. Perhaps the takeaway for today is that 85% of all days in ES are *not* inside days. That ratio is well over 90% when we have above avg volume. Once you know that, it's a matter of handicapping the odds of taking out either the prior day's high or low. Once we saw selling in those leading sectors and breaks to new lows, and once the TICK turned down and we got sellers hitting bids in size, we had a nice trade in ES toward Wednesday's lows and S2. Once selling began drying up in ER2, we saw a shift in the TICK and bounces in the other averages. As I write, we're getting fresh buying (lifting of offers), supporting the bottoming process mentioned earlier. Update tonite on the Weblog. Have a great day.

9:42 AM CT - Got a conference call with a trading firm coming up; gotta scoot. I'll post a summary after I'm off that call. I'm watching for a sign of an upward shift in the TICK distribution that would correspond with putting in a bottom in the recent area of lows. Also watching ER2 closely for indication of that.

9:32 AM CT - Notice how we got lows in ES at 9:16 AM, but Russells held up above their recent lows. Whenever I see a divergence like that, I like to take profits. If there are multiple divergences, I might even consider a short-covering, short-term trade. Anyway, we broke the previous day's lows and all 3 averages are in sync to the downside. We need to stay below the recent trading range in ES to sustain that downside trend. In general, absent a shift toward buying in the TICK and ES volume distribution, that means I'd be looking to sell rallies for tests of recent lows.

9:12 AM CT - Note how volume really picked up on that decline with large traders hitting bids. Very often, after a first bounce from such a high momentum decline, the lows will be subsequently tested. I'm watching those weak sectors ER2 and Semis carefully; if they start showing relative strength, I'd be careful chasing the downside.

9:06 AM CT - Nice illustration here how looking at leading sectors (Russell, Semis) identified early selling, taking us toward a test of the prior day's lows in ES. Also shows how important flexible thinking is. I went into the session looking for the possibility of holding above the preopen lows, which we had rejected. When ER2 flew through those lows, my outlook changed; then NQ broke the lows; that made ES a pretty easy short.

8:41 AM CT - Weakness in semiconductors and Russell has me leaning to the sell side, but so far this is like yesterday AM, with absence of buyers but so far no major selling in the TICK. That created range bound conditions yesterday. Under those conditions it makes sense to not get caught in the middle of the range, but to wait for failed moves or breakouts at range extremes.

8:31 AM CT - Keep an eye on Russell. Weak out of the gate.

8:25 AM CT - Note that we got initial selling in the equity indices on the release of CPI and housing data, but quickly bounced back from the 1437.75 low. What that tells us is that market participants rejected value at that level (which, BTW, is above Wednesday's lows). Recall that value is defined as the region in which the lion's share of volume trades. If we break below that pre-opening low, especially on increased selling volume, that tells us that market participants are repricing equities and re-evaluating value. On the other hand, if we get selling early in the AM and stay above the pre-opening low, then it suggests we may be setting value today higher than Wednesday, which should lead us to take out S1 and Wednesday's highs, with a shot at S2 (those levels are updated daily on the Weblog). I will be watching carefully for the early balance of buying and selling and will be a buyer if we can hold those preopening lows. I'm noting that interest rates have backed off and the dollar has sold off in the last few minutes; overall, we're not getting any fundamental revaluations in those assets due to the CPI, unemployment, and housing data. That once again has me questioning whether we'll see a major revaluation in stocks. Back after the open.

8:10 AM CT - Well, today is a big day for economic releases, but if you were looking for numbers to break us out of the recent trading range in the large caps (Dow, ES), so far that hasn't happened. Core CPI came in a bit higher than expected and, as a result, we're seeing yet further rises in interest rates, with the 10-year approaching 4.82% before backing off a bit. The dollar also strengthened vs. the Euro, but has since given up some of those gains. Still, we're seeing strength in the ES, NQ, and ER2 prior to the open and, if we can hold above Wednesday lows, I'd expect a test of the bull highs in the large cap indices. (See the Weblog for my complete trading outlook and pivot numbers for the day). Note that we'll still have further reports coming out: crude inventories at 9:30 AM CT and the Philly Fed at 11:00 AM CT. If you look at the ES vs. ER2 and NQ, you'll see that any new highs in ES are likely to be accompanied by divergences in the other averages. I will need to see an expansion of volume and strong lifting of offers/strong NYSE TICK on any breakout move to chase highs; until the market shows me otherwise, I see this as a topping market in which momentum and participation have been waning. Back after the open.